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5 C's of Credit

If you are a business looking to obtain business financing of any kind, secured or unsecured, knowing the 5 C's of credit is important. A thorough understanding of the 5 C's of credit will help you improve your preparation for a loan, and thus increase your odds of success at obtaining financing:

1. Credit- what does your credit report and score look like? If you are not aware of your personal credit health then you are in trouble. Have a good idea of what is on your credit report, and how that translates into a credit score. If you take the time to pull your credit, and fix any errors, you could save a lot of hassle down the road. Errors happen, especially if someone got a hold of your identity and used it to obtain credit. Know your score, know your report, and make sure you correct any mistakes on it.

2. Collateral-do you have any asset i.e. your home equity, savings, etc to pledge? Collateral is important when looking to obtain financing. It is a lot easier to obtain a secured loan than an unsecured. There is less risk to the bank, and thus a higher chance for approval. However, you need to determine what you are willing to put up as collateral for a potential loan. Are you willing to risk your home should something go wrong?

3. Conditions in the market-How are market conditions affecting the money banks are willing to lend? Right now the economy is making it tough for the small business as the regulations on bank lending are tighter. Paying attention to the conditions will help you determine when is the best time to seek financing, and what you need to do to get it despite conditions.

4. Character-How will your character look on a loan application? Do you have a history of outstanding liens, drugs, arrests, etc.? Are you located in a sketchy part of town? If your character is iffy, you appear to be a bigger risk to the lenders, and your chances of funding decrease. Choose someone with good character to apply for the loans, or find a way to clean up yours.

5. Capacity-This is one of the most important aspects for lenders, it is the answer to the question of, does the business have the ability to pay on the loan now and in the future? You want to be able to show the bank business plans, pro formas, and other indicators that you will be able to do what you are claiming you will be able to do. They need confidence found in financial records, tax returns, business plans, etc. that if they make you a loan, it will not be defaulted on due to inability to pay.
If you want to be prepared for funding, you have to have the above knowledge, and utilize it in the application process to get the best terms, and highest chance of financing success.

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